Zare Zarev and Commissioner of Taxation
[2013] AATA 777
[2013] AATA 777
Division TAXATION APPEALS DIVISION File Number(s)
2012/0341-0345
Re
Zare Zarev
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal The Hon Robert Nicholson, Deputy President
Date 30 October 2013 Place Perth Decision Summary:
1.The decision under review to allow the input tax credits as they stood on the reservation of the application for review for decision be affirmed.
2.The penalty assessment made pursuant to s. 298-30 of Schedule 1 to the Taxation Administration Act on 5 April 2011 in relation to each of the shortfalls resulting from those net amount assessments be affirmed.
3.The decision to cancel the applicant’s GST registration be set aside and a decision be therefor substituted restoring the registration.
..(Sgd) R Nicholson....................
The Hon Robert Nicholson, Deputy President
Catchwords
TAXATION – GST – review of respondent’s decision of an objection – (1) input tax credits – concessions made by respondent – effect of applicant’s assertions in the absence of proof – (2) penalty assessment – appropriateness of 50% penalty – (3) respondent’s concession to allow decision cancelling applicant’s GST registration to be set aside
Legislation
Taxation Administration Act 1953 – Schedule 1, 105-5, s.284-75(1), s.298-20, s. 298-30, s.284-90, s.284-90(1), s.298-30, s. 14ZZK(a), s.14ZZK(b, s.14ZZK(b)(i)
A New Tax System (Goods and Services Tax) Act 1999 (“GST Act”) – s.5-15, s.9-5, s.11-15(1), s.11-15(2)(b), ss11-20-11-30, s.13-10(a), s.15-5, s.15-5(b), s. 15-20, s.23-5, 23-15, s.25-55(3), s 29-10(3), s.29-10(3)(b), s.29-80(1), s.38-85, s. 42-5(1), s. 66-5(1), s. 69-5, s.69-5(1), s69-5(3), Div 29, Div 38
Customs Tariff Act 1995 Schedule 4
Income Tax Assessment Act 1997 Division 32, s.32-5, s.32-10(1)(a), s.32-45
Cases
Gauci & Ors v FCT (1975) 135 CLR 81
Sobel Investments Pty Ltd v Commissioner of Taxation [2012] AATA 180
Docker v Commissioner of Taxation [2005] ATC 2404
Eldridge v FC of T (1990) 90 ATC 4907 at 4921
LeasePlan Australia Ltd [2009] FCA 1309; 2009 ATC 20-144; 74 ATR 33
Hart v Commissioner of Taxation [2003] FCAFC 105
Federal Commissioner of Taxation v Re D Holdings Pty Ltd (2007) 160 FCR 248
Howard v Commissioner of Taxation [2012] FCAFC 149
Secondary Materials
Nat 10709-05.2004 “Tax and the Home based business
Practice Statements – PS LA 2000/9, PS LA 2002/8, PS LA 2006/2
Miscellaneous Tax Ruling 2008/1
REASONS FOR DECISION
The Hon Robert Nicholson, Deputy President
30 October 2013
This is an application for review by the Tribunal of the respondent’s decision dated 29 November 2011 in relation to an objection lodged by the applicant dated 3 June 2011. The objection was against:
(a)GST net amount assessments made pursuant to s.105-5 of Schedule 1 to the Taxation Administration Act 1953 (“TAA”) on 5 April 2011 in relation to each of the 48 individual monthly tax periods ending 31 March 2007 to 28 February 2011 inclusive;
(b)a penalty assessment made pursuant to s.298-30 of Schedule 1 to TAA on 5 April 2011 in relation to the each of the shortfalls resulting from those net amount assessments; and
(c)the decision by the respondent to cancel the applicant’s GST registration (see “Reasons for our Decision” attached to the respondent’s letter to the applicant dated 5 April 2011 advising the results of an activity statement audit of the applicant). This decision was made pursuant to s.25-55(3) of A New Tax System (Goods and Services Tax) Act 1999 (“GST Act”).
The application for review arose in the following circumstances:-
(a)On 5 April 2011, the respondent sent a letter to the applicant advising him that the respondent had completed an audit of his Business Activity Statements (BAS) for the period 31 March 2007 to 28 February 2011.
(b)On 5 April 2011 the respondent also sent the applicant a:
(i)Notice of Assessment of Net Amounts for the periods 1 March 2007 to 28 February 2011 (Relevant Periods)(GST Assessments); and
(ii)Notice of assessments and liability to pay penalty under the TAA 1953 with respect to the Relevant Periods (Penalty Assessments).
(c)On 3 June 2011 the applicant lodged an objection against the GST Assessments and the Penalty Assessments (Objection).
(d)On 29 November 2011, the respondent gave notice of his objection decision informing the applicant that the Objection was disallowed and enclosing his Reasons for Decision.
(e)On 27 January 2012, the applicant lodged an application for review in the Tribunal.
As the respondent’s submission states, the GST net amount assessments result from the disallowance of input tax credits claimed by the applicant in his relevant Business Activity Statements (“BASs”) in relation to each of the above tax periods. The related penalty is, in each case, equal to 50% of the corresponding disallowed input tax credit.
The reasons given by the respondent in his audit letter of 5 April 2011 for disallowing the input tax credits were:
(a)the applicant was not considered to be carrying on an enterprise (for the purposes of s.9-20 of the GST Act) during the above tax periods;
(b)the expenses on which the input tax credit claims were based appeared, in any event, to be private in nature and were considered not to have any obvious links to commercial activity; and
(c)the applicant’s failure to provide tax invoices for the expenses as claimed creditable acquisitions.
The penalty assessment was based on a conclusion that the applicant made false or misleading statements for the purposes of s.284-75(1) of Schedule 1 to TAA by lodging his relevant BASs claiming the above input tax credits. The respondent also concluded that, pursuant to item 2 of the table in s.284-90(1) of Schedule 1 to TAA, those false or misleading statements were the result of recklessness on the part of the applicant and accordingly assessed the penalty at 50% of the relevant shortfalls.
Those conclusions were affirmed in the respondent’s decision on the applicant’s objection.
Having reconsidered the matter in the light of additional information since provided by the applicant, the respondent, as stated in paragraph 16 of his Statement of Facts Issues and Contentions, now accepts that the applicant was carrying on an enterprise during the above tax periods and that the decision to cancel his GST registration should be set aside.
For this reason, the respondent now accepts that some of the input tax credits claimed by the applicant are properly allowable. Despite this, however, the respondent does not concede that is so in respect of all such claims made by the applicant.
RELEVANT LAW
Before proceeding to examine in detail what it is that the respondent asserts is still in contention it is necessary to examine the relevant law applicable to consideration of the application for review. This has been set out in the respondent’s Statement of Facts, Issues and Contentions and has not been contested by the applicant. It is as follows.
The respondent relies on section 14ZZK of the TAA and, save for any facts expressly agreed or admitted in writing, puts the applicant to proof of all the facts on which the applicant seeks to rely to establish that the assessments the subject of these proceedings are excessive.
On review by the Tribunal, the applicant is limited to the grounds stated in his taxation objection: section 14ZZK(a) TAA 1953. Further, he bears the onus of establishing that the assessment is excessive: section 14ZZK(b) TAA 1953. In effect this amounts to a rebuttable presumption that the assessment is not excessive.
The question for determination is whether the amounts assessed are wrong.
There is no onus on the respondent to show that the assessment is reasonable or supported by evidence: Gauci & Ors v FCT (1975) 135 CLR 81 at 89 per Mason J.
The onus is on the applicant to show its true tax position: Sobel Investments Pty Ltd v Commissioner of Taxation [2012] AATA 180.
Further, it is not open to a taxpayer to complain in circumstances where the quantification of an assessment is complicated by the failure on its part to keep accurate records of account: Docker v Commissioner of Taxation [2005] ATC 2404.
Whilst not a court, and hence not a forum where pleadings and the rules of evidence strictly apply, in considering the application, the Tribunal is confined in its inquiries and deliberations by the applicant’s objections and must act upon the evidence placed before it: Eldridge v FC of T (1990) 90 ATC 4907 at 4921.
RESPONDENT’S APPROACH
In his submissions the respondent explains how he has decided to approach the application made by the applicant. It is necessary to set out in summary the nature of that approach in order that the submissions made by the applicant in relation to it may be properly understood.
Items not sufficiently connected with enterprise or private and domestic
According to s.11-15(1) of the GST Act a taxpayer acquires a thing for a “creditable purpose” to the extent that he acquires it in carrying on his enterprise. Subsection 11-15(2)(b), however, provides that a taxpayer does not acquire a thing for creditable purpose to the extent that the acquisition is of a private or domestic nature.
The respondent accepts that during the relevant tax period the applicant was conducting what might be called in layman’s terms a computer repair business and that the scope of his enterprise is described in his business card which reads:
“Having trouble with your computer or believe its time for an upgrade? Would you like software or hardware installed that’s been recently purchased, developed, or some basis electronics know-how and guidance to finish a home based project? From computers, networking, ADSL Set up and electronics advice to basic home theatre/TV setup we may be able to provide a solution to suit your needs.”
On that basis the respondent has allowed many items that appeared to have a possible connection to the enterprise.
However, the respondent also submits that there are many items that the applicant has claimed that are clearly not connected with any such enterprise and/or are indisputably private or domestic in nature.
Supplier has not made Taxable Supply to the Applicant
According to s.9-5 of the GST Act, a person making supplies to the applicant of the relevant goods and services acquired by the applicant makes a “taxable supply” if:
(a)they make the supply for consideration; and
(b)the supply is made in the course or furtherance of an enterprise that they carry on; and
(c)the supply is connected with Australia; and
(d)they are registered, or required to be registered.
but that, in any event, that supply is not a taxable supply to the extent that it is “GST-free” or “input taxed”.
In the applicant’s case, the reasons for the relevant supplies (i.e. made to him) not being taxable include the circumstances that either it has not been established that the person making the supplies was registered or required to be registered and/or that the supplies by that person were “GST free” or “input taxed”.
Supplier not Registered or Required to be Registered
A taxpayer is not required to be registered unless they carry on an enterprise and they have an annual turnover of $75,000 or more – per s.23-5 and 23-15 of the GST Act. In respect of some claims - e.g. “Occupancy Expenses”, “Running Expenses” (supplied by the applicant’s landlady) and a purchase of a second BMW motor vehicle by way of “private sale” – the respondent contends there is no evidence that the supplier of the goods and services was carrying on enterprise or that they were registered.
Supply to Applicant GST Free
Various categories of supplies are “GST Free” under Div 38 of the GST Act. This means that the supplier of the goods or services to the applicant has no GST liability for the supply. Among the creditable acquisition items claimed by the applicant, the respondent says that certain “education expenses” (per s.38-85) fall into that category
Supply to Applicant Input Taxed
Other items claimed by the applicant relate to “input taxed” supplies under Division 40 of the GST Act. Like GST free supplies, this also means that the supplier of the goods or services to the applicant has no GST liability for the supply. The respondent says that claims for (residential) rent or lodging (i.e.“Occupancy Expenses”,) and interest (i.e. “finance expenses”) fall into that category.
Tax Invoice – Attribution to a Tax Period
An input tax credit can only be claimed if it can be attributed to a tax period – per Division 29 of the GST Act. Section 29-10(3) of the GST Act provides that an input tax credit can only be attributed to a tax period during which the taxpayer holds a valid tax invoice relating to the claimed input tax credit. However, this requirement does not apply to creditable acquisitions of less than $75.00 [s.29-10(3)(b)].
No Creditable Importation
A number of the acquisitions claimed by the applicant relate to goods that he has imported. These are not creditable acquisitions because the relevant suppliers have no GST liability for those supplies. However, an importer who is registered for GST is entitled to an input tax credit if he makes a “creditable importation” (GST s.5-15). But an importation is not a creditable importation unless it also a “taxable importation” – s.15-5(b). An importation will not be a taxable importation if it is a “non-taxable importation” – per s.13-10(a) of the GST Act. Under s.13-10(a) an importation is non-taxable if it is non-taxable pursuant to Part 3-2 of the GST Act. Under s.42-5(1) (which is part of Part 3-2) importations of goods listed in Schedule 4 of the Customs Tariff Act 1995 under items 32A and 32B are non-taxable importations. Essentially this covers goods where the value of the goods imported does not exceed $1,000.
Non-Deductible Expenses
Still other creditable acquisitions claimed by the applicant are “non-deductible expenses” for the purposes of s.69-5(3) of the GST Act and so are not creditable acquisitions by reason of s.69-5(1). Non-deductible expenses include those made specifically not deductible under Division 32 of Income Tax Assessment Act 1997 (“ITAA 97”) because they are properly characterized as “entertainment expenses”.
Lack of Detail
Still other claimed creditable acquisitions the respondent says are not allowable because it is not clear what the relevant item relate to – either because no invoices or other evidence have been supplied or the invoices are not clear or do not provide sufficient detail. The respondent relies on s.14ZZK(b)(i) of the TAA in that regard. He argues the applicant bears the onus of proof and must clearly show that his claims are allowable.
Spreadsheet – List of Items Creditable Acquisitions Claimed by Applicant
In lodging the relevant BASs the applicant was not required to disclose details of the alleged creditable acquisitions on which the claimed monthly totals input tax credits claimed were based. However, the respondent contends in order to show that those input tax credit claims were properly allowable he needs to provide that detail in order discharge his onus of proof. Since lodging his application with the Tribunal he has also lodged a number of documents with the Tribunal to that end. These include, in addition to a number of invoices, a series of exercise books which contain what the respondent understands to be handwritten details of the creditable acquisitions and corresponding input credit claims made in his relevant BASs for each of the monthly tax periods ending 31 March 2007 to 31 December 2010 inclusive. The exercise book entries for each month contain summaries of the claims made and these closely correspond to the creditable acquisition and input tax credit amounts disclosed in the applicant’s relevant BASs.
The respondent has made copies of these exercise books and invoices, numbered and indexed them and then lodged them again with the Tribunal as “Supplementary T Documents” and Further Supplementary T Documents. A copy of these was also provided to the applicant.
In the spreadsheet tendered as Exhibit A the respondent has listed the items disclosed in the exercise books and attempted to match them with the invoices lodged by the applicant with the Tribunal that he says support his claims. In the spreadsheet he has cross referenced the items disclosed in the exercise book with the folio numbers of what the respondent believes are the relevant invoices in the T documents, the Supplementary T Documents and the Further Supplementary T Documents.
Each item has been assigned a reference number which is shown in the extreme right hand column of the Exhibit A.
On the basis of that information the respondent has sought to determine what claims should be allowed.
APPLICANT’S RESPONSE
The applicant says in relation to the above submissions of the respondent “see T-82 for the applicant’s position”. The respondent takes the applicant’s submission to refer to any mail dated 27 January 2011 sent by the applicant to the Australian Tax Officer, Peter Lim in an attempt to address concerns of the respondent in relation to the scope of the applicant’s enterprise and also to assert that the applicant’s expenses associated with his engineering course at The University of Western Australia (‘UWA’) were incurred in the course of that enterprise. The respondent states that he has already conceded many items such as technical engineering text books and magazines (except where imported by the applicant) that might have some tenuous connection with the applicant’s enterprise. In my opinion this submission of the applicant does not lead to any outcome.
Item No 635 August 09 – BMW 318i - $5,000 – Input tax credit claim $454.44
No invoice has been produced for this item. The respondent believes it relates to the purchase of a second-hand car pursuant to a “private sale” (ie. The seller was not registered for GST purposes). As no GST liability would have been incurred by the seller, the applicant is not entitled to any input tax credit in relation to his acquisition of the car, and this is so whether the car was used for business purposes or not.
The applicant has pointed out to the Tribunal that s 66-5(1) provides an exception to the rule that an input tax credit cannot be claimed in respect of a non-taxable supply made to a tax payer if it relates to second-hand goods. The Commissioner’s view of the provision was that it only applied where goods were acquired as trading stock of a taxpayer’s enterprise. Here the applicant is not a used car dealer so that the exception could not apply.
However in LeasePlan Australia Ltd [2009] FCA 1309; 2009 ATC 20-144; 74 ATR 33, Middleton J found that evidence in that proceeding established that LeasePlan business purpose in acquiring vehicles was to “lease” them and to sell them at the end of the leases, so that the whole transaction was a composite operation where the disposal of the vehicles for forecasted valuable consideration was integral to LeasePlan’s business.
Nevertheless, the respondent submits that as can be seen from the applicant’s income tax returns, and from his BASs, his sales were not extensive and in addition throughout the period in question he was an engineering student at The UWA and also had a part-time job there which became full-time in the 2010 financial year.
The applicant submits, however, that the purpose of purchasing the vehicle was to use it for business purposes as a means to travel to and from the University for the service of Unicard Campus Card equipment, on the basis that the applicant would sub-contract Vortel Advanced Systems Services to Unicard, as he was advised by the UWA campus card manager. He asserts that the vehicle was not intended to be used as a show piece in a private collection and that it remained a good, acquired primarily and used primarily for business purposes.
The applicant’s submissions referred to a concession now made by the applicant, that according to the Leaseplan decision, the deduction for GST should be entered in the BAS period in which the vehicle was sold (outside the audit period).
However, the applicant remains of the view that no penalties or interest should apply as the method used by the applicant to calculate GST claimable is that as used and specified in the NAT document published by the respondent. He submits that waiver of penalties and interest would be appropriate. His submissions on penalties and interest will be considered later, below.
In my opinion the applicant has failed to bring evidence to substantiate his assertions on fact and so has not discharged the onus upon him in relation to this item.
Occupancy Expenses
The applicant has claimed a number of items, set out in the submissions of the respondent, for “Occupancy Expenses”. The respondent understands these to relate to the applicant’s personal accommodation, particularly in a private home in a Perth suburb. He does not accept that the expenses are ‘creditable acquisitions’. No invoices have been provided by the applicant in respect of the claims so that it has not been established that any GST was paid or incurred by the person that supplied the accommodation to the applicant. The respondent suggests that the suppliers were probably not required to be registered because of their respective annual turnovers being less than $75,000. In any event, it is submitted by the respondent that the expenses are outgoings of a private or domestic nature.
In his submissions the applicant states that he relied upon the respondent’s published NAT 10709-05.2004 “Tax and the Home-based business” (the Guide’). He submits that this provided for provision of the home work area and he had apportioned the area for that purpose, after the method of selecting a column from the Guide was re-affirmed by the respondent’s Field Services Officer.
The respondent replies that the “Guide” makes clear that a claim for a credit for GST can only be included in the price of the acquisition made. Further, the respondent contends that the Guide is not applicable to the applicant’s situation which involved nothing more than merely “boarding” or renting a small bedroom in an ordinary residence. The respondent states that his understanding is that the applicant had a single room in which he slept, dressed and kept his personal belongings and in which there was also a desk, with a computer, which he used both for his private purposes, including education and business activities. The respondent contends that in these circumstances the applicant did not have “an area of his home set aside exclusively for business activities” in the terms described by the Guide. The respondent submits that the effect of the Guide then is that the applicant could not claim “occupancy expenses (including rent) but he may have been able to claim some running expenses.”
In my opinion, the applicant’s submissions and absence of proof fail to raise an alternative basis for him to make the claim for occupancy expenses.
Running Expenses
The main reason why the respondent has not allowed these claims is that there is no evidence that any GST was incurred by the relevant supplier (the applicant’s landlady who is not registered) and/or that any GST has been included in the relevant amounts charged to the applicant in this regard and that in the circumstances it was unlikely there would have been.
In his submissions the applicant relies again on the Guide. The respondent replies that the Guide makes clear that you can only claim a credit for the GST included in the price of acquisition which you make.
In my opinion, the applicant has not established a proper basis for his claims.
Legal Expenses
The applicant has claimed a number of items for legal expenses. The respondent understands that these relate to expenses that are connected to a greater or lesser degree with an assault that the applicant suffered in 2008 in the bar of the Albion Hotel in Cottesloe. He understands that they include the cost of some medical and other treatments for the injuries the applicant suffered, his attendance as a witness at the trial of his alleged assailant and steps he has taken towards taking civil action against that person and others. The respondent sees no connection between any of these expenses and the conduct of the applicant’s enterprise, and in the circumstance decides that they all appear to be private or domestic in nature.
In his submissions the applicant endeavours to give an account of the circumstances surrounding the assault in September 2008. Aside from the fact that the applicant was at the Albion Hotel and had a work assignment there, there is nothing further to arguably provide a connection between the expenses and the conduct of the applicant’s enterprise. In fact he states that he had never completed the work at the hotel and he had not gone back as the hotel had engaged another company to complete the work and he thought it inappropriate to charge for incomplete work. Nothing the applicant raises on this topic and the absence of proof provides any proper foundation for a different resolution of these claims.
Health including Health Gym
The applicant has claimed a number of items under the description of Health including “Health Gym”. The respondent considers that these claims should be resolved on the same basis and for the same reason as those relating to Legal Expenses.
In his submission the applicant seeks to distinguish between expenditures relating to health in general incurred by the need to maintain a presentable standard for sales purposes in order to further the enterprise and, on the other hand, those which are infrequent, such as post-personal training post assault undertaken to improve physical fitness in the event of any further confrontation. He submits that multiple studies show that increased health risks are associated with sedentary occupations, including weight gain. He argues that as there are 24 hours in a day, 16 awake, 12 productive, 7.5 at work that 15/32nds of health expenses should be claimable as it is unnatural for humans to stay immobile and sitting for such extended periods of time. In his case, as he spends more time in a sedentary occupation (including university to further his business) the allowable claim should be greater, he submits. The applicant also claims to have relied on the Guide.
I agree with the respondent that the items claimed are clearly private or domestic in nature and are insufficiently connected to the applicant’s business. Their essential character is private so they are not allowable. The respondent disputes that the Guide could have been used as an authority to claim GST credits as there is no mention of this type of expense in the Guide. I agree that the applicant’s submissions and the absence of proof do not change the disposition of this aspect.
Finance Expenses
The respondent’s submission stated the applicant’s exercise book ledgers contain numerous items described as “finance expenses”. It also states that the respondent has been unable to match most of those items to invoices so that he cannot be sure exactly what they relate to. However, he states that one normally characterises interest paid on a loan as a typical example of a finance expense. “Financial supplies”, which include the making of a loan in consideration for the payment of interest, are input taxed under subdivision 40-A of the GST Act. This means that the supplier has no GST liability for the supply. Accordingly, the recipient of that supply, i.e. the borrower, cannot claim any input tax credit for interest he pays to the supplier for the loan.
The respondent states that there are a few items which he has been able to match with documentary evidence and they relate exclusively to cash advances made by Cash Converters. The documents relating to these make no reference to any GST payable by anyone. The relevant input credits claimed are in each case based on the applicant dividing the relevant “fees” by 11.
The applicant again says that he relied on the Guide. Nevertheless he concedes that financial expenses are not claimable.
The respondent submits that nothing contained in the Guide suggests that there was any foundation upon which the applicant could rely in this particular respect. The applicant has not shown that to be otherwise and, accordingly, the applicant appears to have accepted the position as asserted by the respondent.
Electronic Goods
The respondent in his submissions states that he has been unable to match any of the items claimed as electronic goods to any documentary evidence. However, he says that many of the relevant entries in the applicant’s exercise book ledgers suggest that the relevant outgoings are simply the repayment of loans on pledged goods. This, he states, is borne out in the case of some of the items where he has been able to match the item to documentary evidence. Further, there is at least one instance of part payment of goods on layby, for which no GST is shown on the relevant documentation. Also he states it is not clear how the acquisition of these goods relate to the applicant’s enterprise, for example, one item relating to the purchase of a bicycle.
The applicant submits that it is incorrect to describe one item as relating to the purchase of a bicycle because the name “Fleet Cycles” is the name of a business that sells bicycles and bicycle accessories. The item concerned referred to the purchase of a discounted heart rate monitor for health purposes while at the gym and during the day. The applicant also states that he relied upon the respondent’s Guide as authority to claim GST credits.
In reply the respondent states that the applicant does not deny that the respondent has been unable to match many items to any documentary evidence and that some relate to the repayment of loans. Further he submits that it is not clear how the acquisition of the goods related to the applicant’s enterprise. In the case of the heart rate monitor he submits that is a private expense. The respondent further contends that the applicant has again appeared to be citing unspecified statements in the Guide in support of the claims for which there is no basis in the Guide.
In my opinion, there is nothing in the submissions of the applicant or the absence of proof to support a change to the conclusions of the respondent.
“Reference – Magazines”
The respondent states that he is prepared to accept that the applicant’s purchases of relevant information technology magazines are sufficiently related to the applicant’s enterprise to be properly regarded as creditable acquisitions. However, he has excluded purchases of magazines relating mainly to computer or video games and generalist magazines, home HiFi and video guides and health and diet magazines. Additionally he has not allowed magazines where the names are not stated.
Again, the applicant cites the Guide as supporting the allowance of all these claims. The applicant relies on the fact that he claims to be running an engineering business and in particular, volunteered his time at UWA as a team leader for semester 1 focussing on building an electric car. He states also that all magazines that do not have adequate tax invoices would fall below the $75 threshold and would be claimable on that basis. He said it would be prohibitive for him to chase down invoices from vendors.
In reply the respondent said that the Guide makes no specific mention of the type of expenses claimed by the applicant. With reference to the applicant’s claim that some magazines may fall below the $75 threshold (see s29-80(1) of the GST Act), the respondent states that under s29-10(3) an ITC cannot be claimed in relation to a tax period in relation to which it would otherwise be attributable unless the taxpayer holds a tax invoice for the relevant creditable acquisition when he lodges his relevant BAS. This is a requirement for obtaining an ITC in addition to those specified in ss11-20 to 11-30 of the GST Act. Section 29-80(1) simply says that subsection 29-10(3) does not apply to a creditable acquisition that relates to a taxable supply, the value of which does not exceed $50 or such higher amount as the Regulations specify (the Regulations now specify $75). However, despite that for an ITC to be allowable it must still relate to a proper creditable acquisition (ie. that satisfies the condition in ss11-20 to 11-30 of the GST Act) and the applicant bears the onus of proving that to be the case. This can be done by means other than a tax invoice. The applicant says it is putting the applicant to proof namely in relation to undocumented claim or claims supported only by a sales receipt that does not give any information about the item purchased.
In my opinion, there is no basis upon which the applicant’s submissions and the absence of proof can lead to a variation of the conclusion now reached by the respondent.
CDM Partnership – Creflo Dollar Partnership
A number of items have been claimed by the applicant under this description. The relevant invoices say that CDM stands for Creflo Dollar Ministries. In the spreadsheet attached to the applicant’s email to the Tribunal dated 17 February 2013 he says that it relates to “Business Mental Health Support Services for Proprietor as a result of assault”. The respondent submits that this is clearly private.
In his submissions the applicant states that he sought emotional treatment as a basis to further his enterprise and avoid suicide. He says he used the Creflo Dollar Partnership as a basis in order to continue with business (including studies) and recover financially as quickly as possible to further the enterprise. He has now ceased requirement for these services. He again relied on the Guide as an authority for him to claim GST credits in this way.
In reply, the respondent states that this is clearly a private expense and, despite what the applicant claims, there is nothing in the Guide which suggests that this is allowable.
In my view there is nothing in the applicant’s submissions and the absence of proof which would lead to any variation in the conclusion reached by the respondent.
“Event” – Hosting”
The items claimed under this characterisation relate to functions held by the applicant in his room at the house for friends and/or clients. The respondent’s understanding is that attendance at these functions was by invitation only and was not open to the public generally. If that is the case then these expenses cannot be creditable acquisitions because they are excluded by s.69-5 of the GST Act. Subsection 69-5(1) says that a “non-deductible expense” is not a creditable acquisition. “Non-deductible expense” includes an expense that is not deductible because of Division 32 of ITAA 97. Section 32-5 of ITAA 97 denies an income tax deduction for “entertainment expenses”. These are defined in s.32-10(1)(a) as meaning “entertainment by way of food, drink or recreation”. This rule, however, is subject to certain exceptions, which include expenses incurred in “providing entertainment to promote or advertise to the public a business’s goods or services” – see item 4.3 in the table in s.32-45 of ITAA 97. However, that exception does not apply if “some people have a greater opportunity to get benefits of the entertainment than ordinary members of the public”. The respondent says that if the functions were by invitation only, rather than open to the public generally, then, for that reason, the exception cannot apply.
The applicant claims that these items should be allowed because they occurred during the “The Pool Project” prior to refurbishing the fence but after the work commenced. That project and anything associated with it has not been otherwise explained. The applicant relies on media and entertainment being the core focuses of the business.
I concur with the submission of the respondent that the applicant’s submission does not contain anything that would alter the conclusion the respondent previously expressed.
Imported Items
The applicant has made a number of claims for imported items described as ‘reference-magazine’ or ‘reference-book’ and so on. The relevant invoices in each case show that the relevant item was imported and do not record any GST component. As stated each acquisition is “A non-taxable importation” pursuant to s 42-5(1) of the GST Act and items 32A and 32B of Schedule 4 to the Customs Tariff Act 1995 – essentially because the value of the goods imported does not exceed $1,000. Any such importation will not be a “creditable importation” pursuant to s 15-5 of the GST Act. As such there is no entitlement to an input tax credit for that importation – see s15-15 and 15-20 of the GST Act.
The applicant relies upon an unspecified statement contained in the Guide.
The respondent reasserts that the Guide makes quite clear that ITCs can only be claimed in relation to supplies made to the tax payer that are taxable.
The applicant does not provide any basis upon which the conclusion of the respondent can be varied.
Travel Expenses
The applicant makes a number of claims under the general heading of travel expenses, these consist of bus fares, taxi fares and motor vehicle expenses. The respondent accepts that at best an apportionment should be made between business and private, and for this purpose submits that the dominant (if not sole) purpose of expenditure is related to the applicant’s private education pursuits and not to his enterprise. However, as a concession to the applicant the respondent allows 80% of the input tax credits relating to his bus fares. Otherwise it puts the applicant to proof.
The applicant submits that the nature of his business was “engineering design, sales and service” and that it was named Vortel Advanced Systems. He claims to have had the business prior to returning to the university as this was the only way it was possible for him to earn an income. He submits that motor vehicle running and taxi expenses should be claimable as they were only included in the ledgers if they were for business purposes.
In relation to this last submission the respondent replies that the full amount of the expenditure incurred in each instance has been claimed with no attempt being made at apportionment. Further, the respondent states that the applicant was at the relevant times a full-time university student, and that most of his travel related to his travel from home to UWA and back, which the respondent states is private. The respondent also states that the applicant was a part-time employee of UWA during this period.
In my view what is submitted by the applicant and the absence of proof does not have the effect of leading to any variation of the submissions made by the respondent.
Telephone Expenses
The respondent concedes that a proportion of the applicant’s telephone expenses may relate to his business. As a concession to the applicant the respondent has allowed the input credits that relate to 75% of his mobile recharges. However, he has disallowed his landline claim (at item no. 306 of Exhibit A). The relevant invoice shows that the claim relates to numerous $0.55 calls made to television promotions.
The applicant submits that the calls were made in an attempt to improve the business’ dire financial position after the assault upon him and that they were made to late night TV shows offering cash prizes. There is nothing in these submissions that would change the position that the disallowance of item no.306 is clearly allowable.
Sundry Private and Unspecified Items
The respondent says that numerous items have been claimed by the applicant for what the respondent states are obviously private items – for example “Household expenses”, “movies”, “video rental” and other personal items. The respondent takes the view that these are clearly not allowable.
In his submissions the applicant states that the movies were hired to determine popular culture in some way. I agree with the submission of the respondent that nothing further needs to be said in response to this paragraph. The applicant also states that household expenses were on charged to the landlady. Again, I agree with the submission in reply of the respondent that this is clearly a domestic arrangement and that the expense items related to it do not relate to the applicant’s enterprise.
Penalty Assessment
The respondent submits that the applicant’s incorrect claiming of input tax credits in his relevant BASs amounts to the making of false or misleading statements to the Commissioner for the purposes of s.284-75(1) of Schedule 1 to the TAA. This is said to makes him potentially liable for an administrative penalty.
The respondent submits that the applicant had relevant short fall amounts in relation to each relevant tax period for the purposes of s.285-80(1) – item 2. The amount of the respective shortfalls was equal to the difference between the amount the Commissioner paid or credited to the applicant as a result of the incorrect claims and the amount that should have been credited or paid if the false or misleading statements had not been made.
Pursuant to s 284-90 the Commissioner has determined that the amount of the penalty is equal to 50% of the respective shortfall amounts. That is equal to 50% of the relevant incorrect input tax credit claimed. Item 2 in s.284-90(1) provides that the base penalty will be 50% of the shortfall amount if the shortfall has arisen as the result of “recklessness” by the relevant taxpayer as to the operation of taxation law.
The respondent’s view on what is reckless is set out from paragraph 99 in Miscellaneous Tax Ruling MT2008/1. At paragraph [102] the respondent states:
“Recklessness assumes that the behaviour in question shows disregard of or indifference to a risk that is foreseeable by a reasonable person. The Full Federal Court in Hart v. FC of T (2003) 131 FCR 2003; [2003] FCAFC 105 (Hart) at paragraphs 33 and 43 endorsed the following comments of Cooper J in BRK (Bris) Pty Ltd v. Federal Commissioner of Taxation [2001] FCA 164; 2001 ATC 4111; (2001) 46 ATR 347 (BRK) at paragraph 77:
Recklessness in this context means to include in a tax statement material upon which the Act or regulations are to operate, knowing that there is a real, as opposed to a fanciful risk that the material may be incorrect, or be grossly indifferent as to whether or not the material is true and correct, and a reasonable person in the position of the statement-maker would see there was a real risk that the Act and regulations may not operate correctly to lead to the assessment of the proper tax payable because of the content of the tax statement. So understood the proscribed conduct is more than mere negligence and must amount to gross carelessness.”
The respondent holds the view that the applicant’s conduct in lodging BASs claiming input tax credits for items which were clearly private or personal in nature and/or not acquired in the carrying on of the enterprise is in itself reckless behaviour for the purpose of section 284-90 of Schedule 1 of the TAA 1953.
In relation to other claims, there is evidence that the applicant has not sought to rely on the information contained in relevant tax invoices in order to ascertain the amount of GST incurred by his supplier in relation to the item but instead has simply divided the gross amount of his expenditure by a factor of 11. The respondent submits that is also reckless behaviour.
Alternatively, the respondent submits that if the applicant’s conduct in relation to particular claims was not recklessness, nevertheless it at least amounts to a failure to take reasonable care, with the result that he is liable to a 25% penalty pursuant to s.284-90(1) item 3.
The respondent accepts that s.298-20 of Schedule 1 of the TAA 1953 gives the respondent discretion to remit all or part of an administrative penalty.
The respondent’s policy on remitting administrative penalties following the introduction of the New Tax System Paragraph 5 of is contained in Law Administration Practice Statements PS LA 2000/9, PS LA 2002/8 and PS LA 2006/2.
The respondent submits that remitting penalties will only be extended where a genuine attempt has been made by the taxpayer to comply with the requirements of the New Tax System. The submission of the respondent refers to Paragraph 5 of PS LA 2002/8 which reads:
“The ATO will take a firm approach with people who fail to make a genuine effort or set out to deliberately avoid their responsibilities. Penalties will not be remitted where it is evident that a taxpayer has:
…
· recklessly approached their tax obligations;
· carried over poor compliance behaviour from the past; or
·repeatedly failed to comply in the face of a clear explanation of what is required.
Although it is the Tax Office’s intention to maintain a fair and reasonable approach to remitting penalties imposed from 1 July 2001, in accordance with policy guidelines in paragraph 5 of PS LA 2002/8 penalties will not be remitted where a taxpayer has recklessly approached their tax obligations.”
The respondent therefore remains of the view that the applicant’s behaviour in lodging BASs including claims for income tax credit for items which are clearly private or personal in nature and/or not acquired in the carrying on of the enterprise is in itself reckless behaviour for the purpose of s 284-90 of Schedule 1 of the TAA 1953 and therefore that the penalty assessment should not be remitted.
Applicant’s Submissions
The applicant submits that according to the Harvard Justice Unit the reason for punishment (which he presumes includes penalties) is twofold. Firstly it is to deter the individual from re-offending and secondly to act as a deterrent to the greater public.
The applicant says that in all his dealings with the respondent he has provided clear and concise advice with regard to any/or Deed Release Settlement agreements.
Further, the applicant submits that the Auditor purposely chose to disregard the information available and provided to him.
The applicant submits that the Auditor relied on his own knowledge of the computer industry and acted in bad faith by being prejudicial and not replying to emails.
The applicant further submits that the computer industry has suffered from depreciation, from international competition from pre-built computers (now from phones and tablets) and even from supermarkets that stock IT items. The applicant being aware of this said that was one of his reasons why he chose not to be solely a computer business, but instead to envelope and provide all possible offerings that both his double degree could provide.
The applicant also submits that if there were any objections to his accounting practices it should have been more appropriately raised by the respondent’s Field Services Officer.
The applicant also states that the services Vortel Advanced Systems provides a very broad (including that of both sub-enterprises) and have a very positive long term future not reliant on the computer industry alone. He says that the business has been able to persist while he has been able to stay alive and that this is a testament to good management by following due process, which the respondent has not done.
Determination of Issue
In my opinion, the applicant has not submitted proof on any of the matters which he has endeavoured to rely upon in his submissions. Frankly, I found it difficult to relate the submissions to the issue of recklessness raised by the applicant.
In the absence of any contradictory evidence or contradictory reasoning by the applicant I am left with no argument to contradict the respondent’s opinion that the applicant’s conduct amounts to recklessness.
I am also of the view that if the applicant’s conduct in relation to particular claims was not reckless, it at least amounts to a failure to take reasonable care, with the result that he is reliable to a 25% penalty pursuant to s.284-90(1) Item 3.
For the applicant’s conduct in relation to particular claims to be reckless, it is not necessary to undertake a subjective enquiry as to whether the applicant had actual knowledge that statements were false. The test to be applied is an objective test, requiring a view to be formed on the extent or degree to which the conduct of the taxpayer applicant falls below that required of a reasonable person that underscores a finding of recklessness. Recklessness assumes that the behaviour in question shows disregard of or indifference to a risk that is foreseeable by a reasonable person. The observations of Cooper J in BRK (Bris) relied upon by the respondent state this and were accepted by the Full Court of the Federal Court in Hart v Commissioner of Taxation [2003] FCAFC 105 at [42] and in Federal Commissioner of Taxation v Re D Holdings Pty Ltd (2007) 160 FCR 248 at 260-261 [70] per Heerey and Edmonds J; 270[109] per Stone J (see also Howard v Commissioner of Taxation [2012] FCAFC 149 at [56] per Middleton , Perram and Dodds-Streeton JJ)
I accept that the inference from the evidence and the applicant’s conduct throughout is that it shows a disregard of or indifference to a risk foreseeable by a reasonable person. In the absence of any basis upon which to contradict the respondent’s submission that the applicant’s behaviour was reckless and with the sound basis for that opinion – namely, that the applicant claimed input tax credits for items clearly private or personal in nature and/or not acquired in the carrying on of the enterprise – I accept the respondent’s submissions that the applicant has engaged in reckless behaviour for the purpose of s.284-90 of Schedule 1 to the TAA 1953.
In my view this supports the exercise of the discretion not to engage in any further remission in either all or part of the administrative penalty. The applicant having recklessly approached his taxation obligations and having patently failed to make a genuine effort recklessly approached such obligations so that, consistently with the policy on which the respondent relies, there will be no remission of penalties.
I note that the items to which the penalty will be applied will be those as they stand after the respondent has allowed a number of items in the applicant’s favour.
CONCLUSION
For the above reasons I consider that the GST net amount assessments pursuant to s.105-5 of Schedule 1 to the TAA in relation to each of the 48 individual monthly tax periods ending 31 March 2007 to 28 February 2011 inclusive (as they have been made as at the date on which the application was reserved for decision) are not open to review on the submissions of the applicant.
I also consider that the penalty assessment made pursuant to s.298-30 of Schedule 1 to the TAA in relation to each of the shortfalls as they stood at the date the application for review was reserved for the preparation of reasons is not to be disturbed on that application.
It is apparent that the decision by the respondent to cancel the applicant’s GST registration should be set aside and a decision substituted restoring the registration.
I certify that the preceding 115 (one hundred and fifteen) paragraphs are a true copy of the reasons for the decision herein of the Hon R Nicholson.
....(Sgd) T Freeman..............
Associate
Dated 30 October 2013
Date(s) of hearing 19/10/2012, 4/12/2012, 1/3/2013 and 23/7/2013 Applicant In person Representative for the Respondent Mr R McGrade
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